The 3 C's of Getting a Mortgage

Last night's show was all about the new rules of mortgages. As I said, the best rules to follow when buying or selling your home are the ones that have stood the test of time. That's why we're going retro!

Over the past 10 years or so, the mortgage industry became incredibly complex in terms of banks selling multiple mortgages as packages to investors—this fueled the rise in what I call ‘funky’ mortgages such as ARMs (adjustable rate mortgages) and interest-only which allowed borrowers to buy much more house than they could afford.

Now the housing market has taken a huge hit and not only are millions of people unable to manage their monthly mortgage payments but homes are worth less than outstanding mortgages—losing banks and home-owners in tremendous debt.

New Rule #1: WANTED: The old-fashioned 3 "C’s". Lenders used to require the following "C's" as a standard to purchase a mortgage—they are back en vogue:

1) CREDIT: You used to be able to get a decent interest rate and big mortgage with a credit score at or around 700 or even upper-600s. Now, good mortgages, meaning, not sub prime mortgages, require higher numbers. Now it takes at least a score of 760 or more to get the best interest rates and if you’re below 660, you’ll have a struggle.

2) CAPACITY: You need to prove that you can repay the loan. Some mortgage brokers and lenders over the past ten years were signing up buyers for loans without asking for any proof of income or ability to repay the loan. Now, you must prove sufficient income and a low debt-to-income-ratio, meaning that not only does your income need to be good, but you need to not be carrying a lot of debt. Cut down as much credit card debt as possible before looking into buying a mortgage.

3) COLLATERAL: You need to put down 20%. Piggy-back loans became popular—basically folding a HELOC into your main mortgage to pay for your down payment—as well as no-money-down mortgages. Very dangerous when the market goes down because they leave you without equity, unless your home value continues to rise. Something you have little control over. Now, however, lenders are looking for a substantial down payment especially in markets that are continuing to fall. The rule of thumb is to put down 20% of the mortgage—[however, with first time homebuyers who tend to not be able to pull together so much cash, there are loans specifically built specifically for those who have less than 20% to put down.]

New Rule #2: No more using your home as a piggybank.

With all this mortgage-money thrown around and housing values rising like crazy, lenders were happy to let you borrow against your home with home equity lines of credit (HELOCs) which are like credit cards tied to your house. That is no more…

With home values dropping so quickly, even people with great credit are being denied HELOC’s. If you’re looking to finance home improvements or pay off debt, don’t look to a HELOC right now—going cash or holding off on big purchases or improvements is the way to go unless you have substantial equity in your home.

MY Rule #3: No more buying too much house!

Do NOT let a mortgage lender tell you how much house you can afford. A solid rule of thumb to protect you when times are tight, or flush, is to not spend more than 30% of your monthly take-home pay on housing costs which includes your mortgage payment, property taxes and insurance. Recession-proof yourself!

5 C's are more useful and realistic.

-Credit -Capacity -Collateral -Cash -Compensating Factors

-Cash is your reserves, showing savings and strength. After all, who would you lend to, someone with good credit, decent income and 20% down collateral or someone with 15% down and $500,000 savings in the bank or 401k.

Compensating Factors also play a role since you would probably fund someone easier who has been at the same job and lived in the same home for 20+ years over a FTHB (First Time Home Buyer) who has lite credit history but high FICO and 3-years on the same job. --Tony, CA

Posted on: 06 Aug 2008 2:44 P.M.

Carmen-Congratulations on your new program "On The Money" You are knowledgeable, personable, engaging and you come across as authentic to the television. It is very empowering to see a woman delivering financial information without "dumbing down." I also like the format of using the subject matter experts. I would like to hear more from them as well.

Outstanding job and much success to you and your team! --Monica

Posted on: 06 Aug 2008 1:58 P.M.

Finally show with common sense and real life solution. I've been in consumer and mortgage finance for 14 years and have never been able to watch other advise shows because the hosts talk to people like they are 5 years old and her books were a waste of paper. This show has real world advice, nearly complete analysis of the callers finacial situation and respond to their specific needs. Great job - great format - HONEST advice. --R.J., IL